Mutual funds are a trillion dollar industry. So for investors, it's important to have a fundamental understanding of mutual funds.

A mutual fund is an entity which accepts money from public investors and employs a professional investment manager to place that money in investments that will meet the fund's objective. A fund therefore is simply a cooperative way for many people to pool their savings together and have their investment professionally managed in the type of investment they choose.

Mutual funds not only differ in their financial objectives, but they also invest in different kinds of securities that reflect the ultimate objective of the fund. Depending on the securities the fund is investing in, or the mix of securities chosen for a specific fund, the element of risk varies substantially.

For example, a fund seeking the highest possible return on capital may invest in more speculative common stocks than one seeking maximum income from dividends. The risk in the first objective is much higher than in the second.

You can see, therefore, that the amount of risk involved is directly related to the fund's objective. Generally speaking, it can be assumed that the higher the potential return, the higher the risk involved.

The rates of return for investments, such as common stock funds have, over time, historically been much superior to that of a savings account with a financial institution. This is because, in a free enterprise system, investors who choose to share ownership of a public business by purchasing common shares are sharing in the fortunes of the business. If it does well they share profits - if it does badly there are little or no profits to share. They therefore expect, and typically get, a higher return for taking this risk.

This varies between one fund and another but the minimum is quite low for most funds - somewhere in the region of $500 - $1,000 would be fairly common. In addition, it is possible with many funds to start at a much lower level if the investor is prepared to make a regular savings commitment and invest in a fixed amount per month. In such cases the minimum may be as low as $50 monthly.

You should only compare funds of similar types to get an accurate picture of relative performances. You cannot compare the rates of return between different types or categories of funds - you have to compare apples to apples, oranges to oranges. For example, it is pointless to compare the results of a fund that invests in technology stocks with one that invests in well-established retail companies like Wal Mart. The risks are quite different, as are the possible returns on the investments.

Most funds have their shares or units valued daily. This means that investors may purchase shares or units on any business day, and in most cases, may redeem or sell those units or shares back to the fund on any business day.

There are hundreds of funds available offering a broad range of investment objectives and investing in a variety of securities and in a variety of geographical locations. For example, there are funds that invest in U.S. large capitalization stocks, international growth stocks, and natural resource stocks. In addition, there are bond funds and mortgage funds. There are also various types of money market or savings funds based on fixed income or guaranteed investments.

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Funds are suitable for retired people provided there is careful selection of the fund's investment objectives. A conservative approach to the preservation of capital may be desirable as one reaches more mature years. There may also be increased emphasis on the income needed for retirement. Funds can provide the means to reach both these objectives.

Basically, all funds charge a management fee which is a percentage of the value of the assets of the fund. On average it is an annual percentage of between 1 and 2 percent. There are also the expenses of administering the fund, which are typically charged to the fund. Together these form the management expense ratio of the fund. In addition, there may be sales commissions charged on the purchase or redemption of shares which are paid to the distributing agency. Remember that commission is paid for the value-added service of investment planning provided by salespeople. The amount of commission will depend upon the size of the purchase.

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